Determination 1045027: nonprofit opera organization loses exemption after inactivity

Plain-English summary

The IRS revoked an organization's section 501(c)(3) exemption after finding that it had not conducted activities in the relevant years. The organization had planned opera-related educational and charitable programs, but its structure and funding did not develop, its board stopped functioning, and its account was closed. The report concludes that the organization did not operate exclusively for exempt purposes and was not entitled to continued exemption. The organization was required to file Form 1120 for later years.

Ruling snapshot

• Question: Did the inactive organization continue to qualify for exemption under IRC § 501(c)(3)?
• Outcome: Revocation
• Key authorities: IRC §§ 170, 501, 6001, 6033, 6104, and 7428; Treas. Reg. §§ 1.501(c)(3)-1 and 1.6001-1

Full text (IRS public release)

[illegible]
Internal Revenue Service
1100 Commerce Street
Dallas, TX 75242
TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Date: July 13, 2010 501.03-00

Person to Contact:

Release Number: 201045027

Release Date: 11/12/10
LEGEND Badge Number:

ORG = Organization name Contact Telephone Number:

XX = Date Address = address Contact Address:
Employer Identification Number:

ORG
ADDRESS

CERTIFIED MAIL

Dear

This is a final notice of adverse determination that your exempt status under section
501(c)(3) of the Internal Revenue Code is revoked. Recognition of your exemption under
Internal Revenue Code section 501(c)(3) is revoked effective January 1, 20XX the following

reason(s):

You are not organized and operated exclusively for an exempt purpose as required by Internal
Revenue Code section 501(c)(3). You are not and have not been engaged primarily in activities
which accomplish one or more exempt purposes. You are not a charitable organization within
the meaning of Treasury Regulation 1.501(c)(3)-1(d); rather, your activities further a substantial
nonexempt commercial purpose and serve private rather than public interests.

Contributions to your organization are no longer deductible effective January 1, 20XX.

Since your exempt status has been revoked, you are required to file Form 1120, U.S.
Corporation Income Tax Return, for all years beginning on or after January 1, 20XX.

Income tax returns for subsequent years are to be filed with the appropriate Service Center
identified in the instructions for those returns.

It is further determined that your failure to file a written appeal constitutes a failure to exhaust
your available administrative remedies. However, if you decide to contest this determination in
court, you must initiate a suit for declaratory judgment in the United States Tax Court, the
United States Claims Court, or the district court of the United States for the District of Columbia
before the (ninety-first) 91st day after the date that this determination was mailed to you.
Contact the clerk of the appropriate court for rules for initiating suits for declaratory judgment.

To secure a petition form, write to the following address:

Please understand that filing a petition for a declaratory judgment under IRC section 7428 will
not delay the processing of subsequent income tax returns and assessment of any taxes due.

You also have the right to contact the Office of the Taxpayer Advocate. However, you should
first contact the person whose name and telephone number are shown above since this person
can access your tax information and can help you get answers. You can call 1-877-777-4778,
and ask for the Taxpayer Advocate assistance or you can contact the Advocate from the site
where this issue was determined by writing to:

Taxpayer Advocate assistance cannot be used as substitute for established IRS procedures,
formal appeals processes, etc. The Taxpayer Advocate is not able to reverse legal or technically
correct tax determination, nor extend the time fixed by law that you have to file a petition in
Court. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling.

This letter should be kept within your permanent records.

If you have any questions, please contact the person whose name and telephone number are
shown above.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892

Internal Revenue Service Department of the Treasury

Taxpayer Identification Number:

Date: May 11, 2010

Form:

ORG
ADDRESS

Tax Year(s) Ended:

Person to Contact/ID Number:

Contact Numbers:
Telephone:

Fax:

Certified Mail - Return Receipt Requested

Dear

We have enclosed a copy of our report of examination explaining why we believe revocation of your exempt
status under section 501(c)(3) of the Internal Revenue Code (Code) is necessary.

If you accept our findings, please sign and return the enclosed Form 6018, Consent to Proposed Adverse Action.
We will send you a final modification or revocation letter.

If you do not agree with our proposed revocation, you must submit to us a written request for Appeals Office
consideration within 30 days from the date of this letter to protest our decision. Your protest should include a
statement of the facts, the applicable law, and arguments in support of your position.

An Appeals officer will review your case. The Appeals office is independent of the Director, EO Examinations.
The Appeals Office resolves most disputes informally and promptly. The enclosed Publication 3498, The
Examination Process, and Publication 892, Exempt Organizations Appeal Procedures for Unagreed Issues,
explain how to appeal an Internal Revenue Service (IRS) decision. Publication 3498 also includes information
on your rights as a taxpayer and the IRS collection process.

You may also request that we refer this matter for technical advice as explained in Publication 892. If we issue
a determination letter to you based on technical advice, no further administrative appeal is available to you
within the IRS regarding the issue that was the subject of the technical advice.

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

If we do not hear from you within 30 days from the date of this letter, we will process your case based on the
recommendations shown in the report of examination. If you do not protest this proposed determination within
30 days from the date of this letter, the IRS will consider it to be a failure to exhaust your available
administrative remedies. Section 7428(b)(2) of the Code provides, in part: "A declaratory judgment or decree
under this section shall not be issued in any proceeding unless the Tax Court, the Claims Court, or the District
Court of the United States for the District of Columbia determines that the organization involved has exhausted
its administrative remedies within the Internal Revenue Service." We will then issue a final revocation letter.
We will also notify the appropriate state officials of the revocation in accordance with section 6104(c) of the
Code.

You have the right to contact the office of the Taxpayer Advocate. Taxpayer Advocate assistance is not a
substitute for established IRS procedures, such as the formal appeals process. The Taxpayer Advocate cannot
reverse a legally correct tax determination, or extend the time fixed by law that you have to file a petition in a
United States court. The Taxpayer Advocate can, however, see that a tax matter that may not have been
resolved through normal channels gets prompt and proper handling. You may call toll-free 1-877-777-4778 and
ask for Taxpayer Advocate Assistance. If you prefer, you may contact your local Taxpayer Advocate at:

If you have any questions, please call the contact person at the telephone number shown in the heading of this
letter. If you write, please provide a telephone number and the most convenient time to call if we need to
contact you.

Thank you for your cooperation.

Sincerely,

Nanette M. Downing
Director, EO Examinations

Enclosures:
Publication 892
Publication 3498
Report of Examination

Letter 3618 (Rev. 11-2003)
Catalog Number: 34809F

886-A EXPLANATION OF ITEMS Page 1 of 2

Name of Taxpayer | EIN: Years/Period Ended
ORG | EIN Dec. 31, 20XX

LEGEND

ORG = Organization name XX = Date City = city State = state CO-1 =
1st COMPANY RA-1, RA-2, RA-3 & RA-4 = 1°° RA, 2™° RA, 3°°RA & 47% RA

Issue 1: Is the ORG operating exclusively for public and charitable purposes as described in Internal
Revenue Code (IRC) Section 501(c)(3)?

Facts

The ORG (“ORG” or “Organization) incorporated on Aug. 21, 19XX in State for charitable purposes
that included increasing awareness. appreciation, and understanding of opera by conducting programs
such as developing school programs to expose students to opera, providing lectures to educate the
public about opera, and by supporting the composition of new American Opera.

The planned operations did not materialize because of lack of structure and volunteers who will
develop and carry out fund-raising program that will provide financial support to carry out the planned
operations. RA-1 — a Juilliard trained voice teacher and a former opera singer was planned to be the
artistic director of the Organization. Due to the lack of the financial support RA-1 was unable to
devote her time to the Organization and she instead engaged in teaching students voice lessons which
she conducted as her own private business. RA-1 rented theater space at the CO-1 in City and she also
provided sometimes free concerts where her students performed in front of the public- those free
concerts’ costs were paid for by RA-1. RA-1 trained several students who gained access to Opera,
including RA-2. Sometimes RA-1 asked her former teacher or a colleague respectively RA-3 or RA-4
to teach some of her students. Those lessons were paid by the students directly to RA-1 or the other
teachers and the Organization did not hire any staff or teachers. The Organization had a bank account
but it was closed in 20XX. In 20XX Organization had no activities. Organization’s Board has not
functioned after 20XX and no meetings were conducted.

Law:

a. Requirement for Exemption under IRC 501(c)(3)

Section 501(c)(3) of the Internal Revenue Code provides for the exemption from federal income tax
of organizations that are both organized and operated exclusively for charitable purposes, no part of
the net earnings of which inures to the benefit of any private shareholder or individual.

The Dual Test: Organized and Operated

1. IRC 501(c)(3) requires an organization to be both “organized” and “operated” exclusively for one or
   more IRC 501(c)(3) purposes. If the organization fails either the organizational test or the operational
   test. It is not exempt. Reg. 1.501(c)(3)-1(a)(1).

2. The organizational test concerns the organization’s articles of organization or comparable
   governing document. The operational test concerns the organization’s activities. A deficiency in an

Department of the Treasury - Internal Revenue Service Form 886-A

EXPLANATION OF ITEMS; Page 2 of 2

Name of Taxpayer | EIN: . Years/Period Ended
ORG | EIN Dec. 31, 20XX

organization’s governing document cannot be cured by the organization’s actual operations.
Likewise, an organization whose activities are not within the statute will not qualify for exemption
by virtue of a well written charter. Reg. 1.501(c)(3)-1(b)(1)(iv).

Operational Test

1. To satisfy the operational test, an organization must be operated exclusively for one or more of the
   following purposes:
   religious
   * charitable
   * scientific
   testing for public safety
   * literary
   educational
   * fostering national or international sports competition (but only if no part of its activities
   involve the provision of athletic facilities or equipment)
   prevention of cruelty to children or animals

Section 1.501(c)(3)-1(c)(1) provides that an organization is operated exclusively for charitable purposes if it
engages primarily in activities that accomplish those purposes in (1) above.

Taxpayer’s position:

Taxpayer was requested to submit comments on the Form 5701 that was sent on March 26, 20XX.
The taxpayer’s reply signed on March 29, 20XX indicated agreement with the facts concerning
organization’s operations as were presented in the draft report that was sent on March 26, 20XX.

Government’s Position:

The government contends that the ORG did not conduct any activities in 20XX and prior years and
therefore it did not operate exclusively for one or more of the purposes specified in Section 501(c)(3).
Therefore. as explained, the ORG failed to meet the requirements for exemption under Section
501(c)(3) as is further explained in Reg. 1.501(c)(3)-1(b)(1)(iv).

Conclusion: as described above. the ORG Section 501(c)(3) exemption should be revoked effective
January 1, 20XX.

Department of the Treasury - Internal Revenue Service Form 886-A